Awaiting NTP: Proposed policy expected to pave the way for further growth

As the Indian telecom sector moves away from the dominance of the voice segment and the urban market to explore the growth potential in the data segment and the rural sector, there has emerged a need for a progressive policy that would usher in the next level of growth. The 2G telecom scam, involving the former telecom & IT minister as well as top officials, and the recent debate on 3G roaming pacts and licence cancellations have further underscored the need for a policy revamp.

In light of this, the government, in October 2011, released the draft National Telecom Policy (NTP), 2011, which aims to promote inclusive and equitable growth. The draft policy has proposed several key initiatives, including simplification and rationalisation of the licensing regime, and a transparent system for allocation of spectrum and its efficient usage. It also envisages discovery of spectrum pricing through market-related processes and free nationwide roaming. It aims to address other crucial issues as well, including mergers and acquisitions (M&As), and spectrum sharing.

The NTP also promises to make available secure, reliable and affordable voice telephony and high speed broadband services to every citizen, with special focus on rural and remote areas. It would also help improve the broadband experience by enhancing delivery speeds, besides making India a global hub for manufacturing electronic products, including telecom equipment. Security concerns will also be a key focus area.

The following are the highlights of the policy proposals and their likely impact on sector growth...

Spectrum limit, pricing and sharing

The maximum spectrum holding limit for a post-merger entity is recommended to be increased from the current 15 per cent to 25 per cent of the spectrum assigned in the particular circle. This will allow operators that currently hold about 15 per cent of the spectrum in a circle (regardless of how much spectrum is available per circle) to acquire or merge with another player. Limiting the spectrum at a certain percentage level enables the total amount of airwaves held by an operator to be raised, with additional spectrum being allocated in that circle. In the Mumbai circle, for instance, 107.4 MHz of frequency division duplex spectrum has been allocated for telecom services. The proposed spectrum holding limit implies that an operator will be able to hold about 26.5 MHz of spectrum in the circle. This will facilitate industry consolidation.

Compared to the pricing in 2008, spectrum charges (for up to 6.2 MHz) are proposed to be increased from Rs 2.91 billion to Rs 19.24 billion per MHz. For spectrum in excess of 6.2 MHz, it has been proposed to increase charges from Rs 2.91 billion to Rs 49.7 billion.

The proposed one-time charge for spectrum beyond 6.2 MHz will have negative financial implications for incumbent operators. Based on the current spectrum allocation, Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited will have to pay a high premium in the form of one-time excess spectrum charges. Among private players, the highest spectrum charges will be about Rs 38.2 billion for Bharti Airtel, Rs 22.85 billion for Vodafone, Rs 14.45 billion for Idea Cellular, Rs 11.5 billion for Aircel and Rs 0.85 billion for Reliance Communications. Therefore, for several players, the one-time excess spectrum charges are almost equivalent to the 3G spectrum prices.

The draft policy envisages greater infrastructure sharing, including pooling, trading and sharing of spectrum. This will enable operators to reduce network costs and improve profitability. Although the operational details and timelines of the initiative have not been mentioned, spectrum sharing can generate substantial cost savings for the industry. Operators can generate up to 52 per cent savings in capex on a per erlang (Er) basis in a two-operator-sharing scenario. (Assumptions: capex per Er of $700, capacity per site of 34 Er in a single-operator scenario and spectral efficiency of 2.1x, resulting from spectrum sharing in a two-operator scenario.)

Spectrum road map

The overall concept of having a road map is important as the carriers need to know what the network rollout scenario will be in the future. A spectrum road map every five years will give industry players greater flexibility for network planning. The release of an additional 500 MHz by 2020 will help operators augment network capacity.

However, uncertainties regarding timelines and the operational process still exist. Certain areas, such as white space and digital switchover, have been missed out. A clear road map for refarming spectrum from non-commercial entities also needs to be developed as its success and future spectrum allocation will depend on the effectiveness of such refarming.

One nation, one licence

The concept of one nation, one licence, as defined in the draft NTP 2011, envisages a single licence across services and service areas to enable convergence. This includes enhancing the scope of mobile number portability (MNP) and introducing free roaming. The scope of this regime would include dividing technology-neutral unified licences into two categories – network service operators and service delivery operators. It will also involve framing an appropriate exit policy for licensees and putting in place a framework that will regulate carriage charges that are content neutral and are based on bandwidth utilisation.

Enhancing the scope of MNP and eliminating roaming charges will entail extending intra-circle MNP on a nationwide basis, so that consumers can retain their numbers while shifting from one circle to another, irrespective of the operator.

“Eliminating roaming charges will entail a review of these tariffs with the objective of eventually removing them across the country. This suggestion has several advantages and disadvantages. A major positive is that it will prevent users from switching operators even if they switch circles. This will also help reduce churn. On the other hand, removing roaming charges would benefit less than 10 per cent of the country’s travelling population, while 90 per cent would be paying higher tariffs,” says Abhishek Chauhan, senior consultant, ICT, South Asia and Middle East, Frost & Sullivan. He thinks this will temporarily have a negative impact on operators’ earnings before interest, taxes, depreciation and amortisation margins, which may decline by 4 to 5 per cent as roaming charges account for approximately 10 per cent of the operator’s overall revenue. Moreover, according to Chauhan, the policy may favour incumbent players as increased tariffs may negatively impact new and smaller players who survive the tariff war.

In terms of impact on revenue, its quantification is the biggest challenge at this stage. At present, service providers pay between 6 per cent and 10 per cent of their revenues as licence fee, depending on the circle. They also pay 6 per cent of revenues to offer domestic and international long distance services and internet telephony services.

M&As

Most countries around the world have four-five telecom operators with an average spectrum allocation of 17 MHz-20 MHz. In contrast, India has around 14 players with a maximum of 10 MHz of 2G spectrum allocated to an operator per circle. However, going by the subscriber and revenue market share, it is evident that there are seven dominant players and the new entrants are making only a minuscule contribution. This presents a strong case for consolidation in the industry.

The draft policy proposes a more liberal M&A regime to allow consolidation. Apart from framing an exit policy for non-serious players to surrender their mobile licences and airwaves, the draft policy envisages clearer rules for the renewal of these licences.

Moreover, the policy recommends network sharing and the establishment of a legal, regulatory and licensing framework for convergence of services, networks and devices.

Broadband

So far, the country has missed successive broadband targets. The draft NTP 2011 envisages 175 million broadband connections by 2017 and 600 million by 2020. It also proposes to increase India’s broadband download speed from 256 kbps to 2 Mbps by 2020.

To meet the connectivity requirements associated with sectors like education and health, the draft NTP proposes the Right to Broadband plan, under which access to broadband services will be considered a basic right of every citizen.

The NTP 2011 is also aimed at enabling citizens to participate in and contribute to e-governance in areas such as health, education and banking. This would help connect rural India with the rest of the country through broadband. In addition, digital empowerment initiatives will gain momentum, and new revenue streams will open up for operators and value-added service players.

Manufacturing

Manufacturing is one area where the Indian telecom sector has lagged so far. In order to provide a fillip to the domestic manufacturing industry, the policy aims to meet 80 per cent of the sector’s demand from these entities with a value addition of 65 per cent to this market by 2020.

It also highlights the government’s intention of making India a global hub for telecom equipment manufacturing, and promoting research and development (R&D) and product development. Towards this end, the creation of a corpus to promote indigenous R&D, institution of intellectual property rights, entrepreneurship, manufacturing, and commercialisation and deployment of state-of-the-art telecom products and services during the Twelfth Plan have been recommended.

However, keeping a check on the growing influence of foreign players, particularly Chinese multinational firms, in view of risks related to national security, will be a major challenge.

Progress so far

The draft policy provides an overview of the changes required in the sector. It will be filtered at various levels before it becomes a final policy document.

The Department of Telecommunications’ (DoT) recent decision to auction additional airwaves will help the government generate more revenue in a transparent manner. But how DoT will address the growing need for more spectrum is still unclear even as its efforts to get radio waves vacated from the defence forces have failed so far.

All the licensees, except one, have launched their 3G services but these have failed to take off in a big way so far. The biggest twist has been the differences between the operators and DoT over intra-circle roaming. The matter is now in court.

Meanwhile, the government continues to struggle with security-related concerns. Though the BlackBerry issue has taken a backseat for now, monitoring of social networking sites and internet content has put the government in the dock. No major progress has been made on the issue of electromagnetic radiation from the growing number of towers and mobile handsets.

Clearly, there is an urgent need for a strong and effective new telecom policy, which is forward-looking, ensures proliferation of communication services in the hinterland and, above all, is able to instil confidence in the stakeholders.

Currently, the Telecom Regulatory Authority of India is working on recommendations for various telecom-related issues. Once these are finalised, the new telecom policy is expected to be unveiled in mid-2012.